Mitigation and the reasonableness of a settlement agreement

In Rentokil Initial 1927 plc v Goodman Derrick LLP, the court revisited the issue of mitigation which I commented on in August. This time the context was somewhat different as the point arose in relation to a solicitor’s negligence claim where the claimant had resolved remedial arbitration proceedings that it had launched, seeking to recoup its losses due to alleged negligence in drafting a sale agreement. Indeed, it spent some £600,000 on costs in the arbitration, which it claimed as damages. Notwithstanding this expenditure, the arbitration was compromised, apparently as a commercial deal without regard to the merits of either party’s case.

Mitigation of loss

The onus of proving failure to mitigate is on the defendant, who must show that the claimant failed to act reasonably. As Waterlow & Sons Ltd v Banco de Portugal explains, this burden cannot simply be discharged by showing that some other, and less burdensome, remedial measure was available if the course of action actually chosen was reasonable in all the circumstances.

It is a question of reasonableness

However, the claimant faced a difficulty. It had disclosed initial advice that it had a better than even chance of succeeding and yet it resolved the arbitration on terms which involved only minor concessions from the other side. As it refused to disclose further advice given during the course of the arbitration and settlement negotiations, the court had no evidence on which to conclude that the course adopted (the settlement) was reasonable.

The court was forced to conclude that the reason for settlement was not connected to the merits of the case and therefore did not arise from the defendant’s alleged breach of duty. Therefore, as the court had held that the claimant would have succeeded in the arbitration, it concluded that, in settling it when it need not have done so, it acted unreasonably.

Claims based on the evaluation of a chance of success in litigation are notoriously fraught with difficulty. Decisions must be made as to whether privileged material can be disclosed, which will inevitably be finally balanced. Advice given for the purpose of remedial proceedings may not be of assistance or may even be harmful in subsequent proceedings for negligence.

In this case there was no evidence to show that the risks of litigation had been a factor in the settlement negotiations leading the court to draw inferences adverse to the claimant. Only disclosure of privileged material might have averted this outcome but, even then, only if it demonstrated that the claimant’s decision to settle was reasonable.